Winning “The Money Game” – Timeless Classics, Final Selection

Dec. 27, 2010 11:36 PM ET

This is the final review of the Top 10 Timeless Investment Classics that I keep within arm’s reach of my desk. My criteria to be a “classic”? Brilliant and original investing insights and accessible writing that still speaks to us today. To be considered a “classic,” the book must have stood the test of time. These 10 qualify; they were published as far back as 169 years (and as recently as 43 years) ago. I believe these books can teach us more about human nature, investing, and wealth and risk management than anything written before or since... (Of course, if you want to buy my more recent book as well, who am I to discourage you?!!!)

In chronological order of their original publication, here are the preceding 9 reviews:

Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackey (1841)

The Crowd: A Study of the Popular Mind, by Gustave Le Bon (1896)

Reminiscences of a Stock Operator, by Edwin LeFevre (1923)

Security Analysis, by Graham & Dodd (1934)

The Battle for Investment Survival, by Gerald M. Loeb (1935)

Where Are the Customers' Yachts?, by Fred Schwed, Jr. (1940)

The Intelligent Investor, by Benjamin Graham (1949)

The Art of Contrary Thinking, by Humphrey Bancroft Neill (1954)

Common Stocks and Uncommon Profits, by Philip Fisher (1958)

And now #10, written in 1967 by ‘Adam Smith’, the pseudonym used by Jerry Goodman, a successful novelist, screenwriter, non-fiction writer and (hence the pseudonym when writing about Wall Street and stock markets) the former editor of the financial monthly Institutional Investor.

I began this series with Charles Mackay’s1841 Extraordinary Popular Delusions and the Madness of Crowds.It is only fitting to end with The Money Game.Both books, though written 126 years apart, offer timeless insights into how investors (including, in the latter book, allegedly “professional” investors) provide substantive food for thought on how investors make and lose money in the markets.

Mr. Goodman delves a bit more deeply into fundamentaland technical analysis, accounting practices, behavioral finance, random walk theories and such than Mr. Mackay did, but in the final analysis the game is about the players, not the rules or the features of the board. Some players are serious solely about leaving with a greater net worth than they came with; but others are motivated by a desire to win, or to beat others (not always the same thing), or to get the adrenalin flowing, or to avoid bigger decisions, or for a myriad of other reasons.Understanding this makes the vagaries and vicissitudes of the market easier to accept, if not to understand.As he says most succinctly in his first Irregular Rule: “If you don’t know who you are, this [the market] is an expensive place to find out.”But the most important Irregular Rule, still dealing with people, albeit in this case the people you want to see running the companies whose stocks you own, is “…find smart people, because if you can do that, you can forget a lot of the other rules.”(Predating Warren Buffett by some number of years…)

In the second paragraph of the very first page of the book, Goodman tells you what it’s all going to be about: “This is a book about image and reality and identity and anxiety and money.”When he says “image,” he refers to what government or a corporation or Wall Street tells you is true.When he says “reality,” he refers to what is really true. As he pens a bit further on, echoing Mackay, as well as great investors before and since, “Market values are fixed only in part by balance sheets and income statements; much more by the hopes and fears of humanity; by greed, ambition, acts of God, invention, financial stress and strain, weather, discovery, fashion and numberless other causes…”

After devoting Part I of the book primarily to market and investor psychology, he turns in Part Two to “Systems,” be they academic roads to finding the perfect and occasionally efficient frontier or the technicians’ zeal to be right, even if they are not rich.One may say every day that prices can be predicted from the past moves, while the other says (this week) that there is no way to beat the market, so you may as well simply buy an index fund.Which is the best system?Neither – and none, including today’s quants’ belief in the infallibility of computers, algorithms and programmed trading. Goodman shows that all “systems” depend on analyzing something that has happened before to predict what will happen next.This may well work in academic papers or in an algorithm, but you cannot reduce the whims of 50 million souls to an algorithm.And you never will.

In Part III, the author deflates any notion that the “professionals” have any special relationship with the Clue Bird that is unknown to the average investor.True they have more information – but they have no better information.And they are as subject to the emotions of their Everyman counterpart when faced with making the tough decisions.

If some of these conclusions seem obvious, it is not because they were once obvious, but rather because authors like Jerry Goodman made such a convincing case that we finally began to take them as truisms.The delightful discovery here is that he does it with great wit, great verve, and great humor.Good writing about a great subject or great writing about a good subject, the result is the same: a great read.

Think not that this book is dated, any more than a mere 159 years makes Extraordinary Popular Delusions and the Madness of Crowds dated.Whether it is the Go-Go Sixties of Goodman’s day, the dot-com New Economy Nineties, or the Real Estate Will Never Decline 2000s, those in the game rely more than they know on their passions, hopes, and dreams. Just change the names of the companies or the sectors and you’d never know which of these periods, or some other, you were in.Reading The Money Game will give you that perspective – and maybe even a shot of inner peace for context!

Disclosure: No positions mentioned. These books are about lifetime knowledge, not flash-in-the-pan trading.

Disclaimer: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month!

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.